The Corner

The one and only.

Senator Warren: Not the Wonk the People Have Been Waiting For


On the homepage today, I make the case that Senator Elizabeth Warren isn’t really the wonky savior her fans think she is. She has some undeniable political talents, which were on display during an event she did this past weekend with Thomas Piketty in Boston, but her policy work so far (and her policy views, so far as I can tell) are unserious populism with a few slick figures tacked on more than they’re a well-researched progressive vision.

Warren has a long political career ahead of her, so maybe she’ll prove me wrong (her actual academic work, by the way, does little to call this into question). But there are plenty of examples of this issue, including a number I didn’t have space to address in my piece: I allude to her first student-loan proposal in the Senate being summarily dismissed by liberal and conservative higher-ed analysts, but I didn’t explain why.

Briefly: Last year, Congress was considering what rate to apply to federal student loans, after an extra-low rate paid for by various stimulus packages was about to expire. Republicans and Democrats disagreed on where it should be set and how much it should be allowed to vary with market conditions. Elizabeth Warren took an entirely different tack: She basically wanted to pay people to take out student loans. Seriously, she proposed that for the next year, loans be offered at a 0.75 percent interest rate, well below the rate of inflation. And, of course, below any kind of long-term loan terms anyone could ever get. I’ll let two analysts from the predictably brutal Brookings wrote the following:

Sen. Warren’s proposal should be quickly dismissed as a cheap political gimmick. It proposes only a one-year change to the rate on one kind of federal student loan, confuses market interest rates on long-term loans (such as the 10-year Treasury rate) with the Federal Reserve’s Discount Window (used to make short-term loans to banks), and does not reflect the administrative costs and default risk that increase the costs of the federal student loan program.

Warren was proposing to subsidize student borrowers so generously that her proposal would substantially increase the deficit using the federal government’s current accrual accounting methods – which understate the costs of loans substantially. The whole proposal would probably not cost the federal government money on a cash basis, as 0.75 percent interest should cover the administrative costs of the loans, but in certain tranches of loans, it would. On an honest accounting basis — taking into account market risk — it would cost the federal government tens of billions of dollars to keep offering such loans. It’s a huge giveaway to new borrowers: applying a rate that’s extended for a matter of days from the Federal Reserve to the world’s largest financial institutions to taxpayer-funded loans offered students for a matter of decades without so much as a credit check. If you ignore all of these issues, as Warren does, sure, it’s a great idea. (Now, as I explain in the piece, she’s onto another gimmicky plan to propose giving tons of money to existing borrowers.)

This gimmickry has infected Warren’s approach to her own signature issue, too, financial reform. She and John McCain teamed up last year to push for a restoration of Glass-Steagall, the FDR-era regulation that separated investment banks and commercial banks until it was weakened in the 1980s and then repealed in the 1990s. She attempted to link the end of Glass-Steagall to the rate of commercial-bank failures, the failure of the hedge fund Long-Term Capital Management, the recent financial crisis, and a whole bunch of other things that didn’t have much to do with Glass-Steagall. It’s a feel-good and intuitively appealing policy that wouldn’t do much to solve the current problems with our financial system.

Don’t believe me? A discussion I did back when she proposed the bill with Mike Konczal, a serious liberal at the Roosevelt Institute who knows financial regulation extremely well, and William Cohan, a former Lazard banker who could probably described, favorably, as a radical centrist on financial issues, found they weren’t impressed with the idea either. This fundamental problems applies to other Warren financial-regulation ideas, too: For instance, she’s pushed for the SEC to pursue more criminal prosecutions and take fewer civil settlements, which sounds appealing, and might be a decent idea as a matter of justice, but we have no idea if it’s an effective way to curb risky practices at banks. And then there’s the failures of the agency she actually managed to invent . . .


Sign up for free NRO e-mails today:

Subscribe to National Review